1. Chapter 14 - International Budgeting and Performance Evaluation
Accounting 4570/5570
Chapter 14 - International Budgeting and Performance Evaluation

2. Overview Strategic Control Process
Strategy - decisions about which businesses to be in, where to locate operations, and how to be competitive as well as the firm’s response to changes in the global business environment
Setting Objectives
Choosing a suitable target varies among countries
Best measures are those which focus on the purpose for which the business unit is intended

3. Common Performance Measures
Return on investment (ROI)
Sales
Cost reduction
Quality targets
Market share
Profitability
Budget to actual

4. Research on Performance Evaluation
Most foreign subsidiaries evaluated on the same basis as domestic subsidiaries
U.S. firms - ROI most used
U. K. firms - Comparison to budget and ROI
Japanese firms - other measures than ROI; particularly sales, sales volume, and long-term measures. ROI generally not important.

5. Research on Performance Evaluation
ROI - highly criticized due to potential suboptimization
Nearly all MNEs used some supplementary device to gauge foreign subsidiaries’ performance
Most widely used supplementary measure - comparison to budget

6. Practical Suggestions on Performance Evaluation
Evaluate foreign subsidiaries on how well they are meeting their intended purpose
Separate the evaluation of the manager and the overall subsidiary performance
Include translation adjustments only if manager has authority to hedge
Compare performance with plan
Method of evaluation should be understood by the foreign managers

7. Budget Process Formal or informal process? Who participates?
Style of communication? (formal vs. informal)
How are objectives set?
Should budgeting process differ for foreign subsidiaries?
Time period covered? (Short versus long-term?)
Financial or nonfinancial objectives? Or both?
How does volatility in the industry/country affect the budget?

8. Studies on Budgeting
Top-level Mexican managers generally liked to participate in budget process
However, lower-level Mexican managers did not like to participate
Mexican managers of entirely foreign-owned subsidiaries did not like to participate due to feeling powerless.
Australian and Singaporean managers preferred to participate in budget process

9. Studies on Budgeting
Japanese used budgets to plan increased sales volume
Japanese budgets prepared and used in a more timely manner
American managers more likely to participate and be evaluated and compensated by budgets

10. Interaction of Culture and Geographic Distance
Hassel and Cunningham (2004) studied how the combination of culture and geographic distance (psychic distance) influence the budgeting process.
Subsidiaries that are culturally similar and geographical close (low psychic distance) tend to show greater financial performance than budget
Subsidiaries that are culturally distinctive and located far away (high psychic distance) will show weaker financial performance than budget

11. Problems Related to International Business in Budgeting
Enhanced coordination and communication
Foreign currency reporting
Which currency to use
Difficult for top management to interpret statements outside their domestic currency
Responsibility for forex translation gains/losses
Authority for hedging?
Do we want the subsidiary to think in terms of the parent company profitability?

12. Problems Related to International Business in Budgeting
Degree of Autonomy
Purpose of subsidiary
Should externalities in the foreign country (wars, disasters, government intervention) be included?
Exchange Rates to use
Actual rate at time budget is prepared
Projected rate at time budget is prepared
Actual exchange rate at end of period

13. Exchange Rates Exhibit 14.4, page 392
A1, P2, E3 only combination that eliminates all exchange rate variances
Exhibit 14.5, page 393 survey shows how many companies use the different exchange rate combinations.
P2 (same rate used = projected exchange rate at time of budget) most common
P3 second most common

14. Other Issues
Capital Budgeting - consider the risk factor of foreign currency exchange in discount rates and cash flows

15. Intracorporate Transfer Pricing
Definition
Theoretical price: Costs incurred + lost contribution margin
Perfect market conditions
Market price charged if producing at full capacity
Variable costs charged if producing at less than full capacity
Real world: Price somewhere between the two

16. Intracorporate Transfer Pricing
International Complications
Taxes
Competition
Import duties
National controls (currency rationing, limits on amount of cash taken out of country)
Profitability of subsidiary
Local partners
Exhibit 14.8, page 401

17. Overhead Allocation Cross-national allocation of overhead and expenses
Behavioral issues
Foreign issues
Foreign currency translation
Taxation
Lessons from the Japanese
Cost drivers
Motivation to reduce costs

18. Costing Issues Role of management accounting in corporate strategy
Standard Costing - should same standards or procedures be used throughout the world or should they be tailored to individual locations?

19. Emerging Trends in Performance Evaluation
Focus of evaluation shifted to strategic business units (SBUs)
More use of ratios
More use of cash flows
More use of non-financial criteria
Economic Value Added (EVA)
Balanced Scorecard

20. Economic Value Added (EVA)
EVA = [ROIC – WACC] x AIC
ROIC = Return on invested capital (operating profit minus cash taxes paid)
WACC = after-tax weighted average cost of capital
AIC = average invested capital = average stockholders’ equity + average debt

21. EVA
Positive EVA requires that a company earn a return on its assets that exceeds the cost of debt and equity.
It is an actual monetary amount of value added.
It measures changes in value for a period.

22. Balanced Scorecard
Approach to performance measurement that links the strategic and financial perspectives of a business
Four perspectives:
Financial measures
Customer measures
Internal business processes
Learning and growth

23. Cases Korean Subsidiary (Exercises 1-2) Lucas Inc. (Exercises 3-5)
Uplift International Ltd. (Exercise 10)
Niessen Apparel (website)